National Academy of Sciences Recommends Updated Framework for Social Cost of Carbon Calculations

On January 11, 2017, the National Academies of Sciences, Engineering and Medicine (NASEM) released a report, “Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxider,” recommending an updated framework for how the Federal government calculates the social cost of carbon (SCC) in regulatory rulemakings and other economically significant regulatory actions. The SCC is a cost-benefit analysis tool designed to estimate “the net damages incurred by society from a 1 metric ton increase in carbon dioxide emissions in a given year.”

The IWG asked NASEM “to examine the technical merits and challenges of potential approaches to improving the SCC estimates in future updates.”[1] NASEM’s panel of experts issued a preliminary “Phase 1 Report” in early 2016, calling for clearer acknowledgment of the uncertainties associated with the SCC estimates.[2] The Final SCC Report recommends both short-term changes to calculating SCC estimates and longer-term considerations for improving the tool.

Future updates to the SCC should “unbundle” the three distinct models used to generate the SCC estimates in order to make the final cost calculations more transparent. This so-called “unbundling” or “integrated modular approach” would include four separate “modules”: (1) a socioeconomic module projecting future global and regional population, output, and emissions; (2) a climate module calculating the effect of emissions on temperature, sea level, and other climate variables; (3) a damages module estimating and, to the extent possible, monetizing the physical impacts of climate on human welfare; and (4) a discount module discounting monetary damages to the year of emission.

Future SCC updates should move away from the current fixed discount rate approach for discounting the present-day value of climate-related damages projected to occur in the future, reflected in the 2015 SCC estimates.

The IWG should update the “damage functions” underlying SCC calculations to incorporate damages currently omitted from the SCC, including ocean acidification and regional “spillover” effects, such as climate-induced human migration. The Final SCC Report also recommends that future SCC estimates account for “nongradual damages,” i.e., critical tipping points in the global climate system. The SCC should be updated every five years under a more consistent and comprehensive framework, as outlined in its recommendations.

While acknowledging that the IWG relied on global climate damages when developing its SCC estimates, as opposed to focusing on domestic costs and benefits, as advanced in past OMB practice, the Final SCC Report highlights limitations to any purely domestic damage estimate.

Distinct from the NASEM recommendations, the Trump Administration has signaled that it favors a different approach to calculating SCC estimates and using the tool in governmental decision making.

The uncertainty surrounding the fate of the SCC means that it is likely to remain a contentious issue in the near future. Environmental groups will likely continue to push for the use of the SCC for individual, project-level decisionmaking, including as a component in evaluating the impacts of climate change and carbon emissions in National Environmental Policy Act analysis. The courts, which have thus far largely deferred to agencies’ use of SCC estimates in regulatory analysis,[3] will likely also play an important role in determining the future of the SCC.

Latham & Watkins Environment, Land and Resource attorneys will continue to closely monitor these issues as they develop.

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